Bank of Japan

Trading the BOJ

A new era begins for Japan’s BOJ

A new governor and a new direction for the BOJ? We’re about to find out so here’s some thoughts about trading it.

Just getting my (Ryan) ducks in a row ahead of the BOJ and I’m going to be watching a very wide area in USDJPY, which (give or take a few yens), we’re in the middle of (127-138). With events like this you have to know the sentiment on both sides of a pair so that you know how to react if something happens that moves the price the opposite way of that sentiment.

Right now, we know the market is less certain about the dollar, the Fed and the data, and the political stuff, hence why yields keep dropping and USD keeps a slightly bearish tone. So, if USDJPY rallies on the BOJ, and US yields remain under the cosh, as does USD vs other pairs, a rally here would look out of place, and then we ask how far does that go before a counter trade becomes too good to resist?

I’m positioned short already and happy to add up to that 138 if seen, and if only mainly driven from the JPY side. A sustained move over 138 and I’ll be reassessing that trade. On the otherside, a steep drop on the BOJ would mean they’ve signalled a change is coming and that’s going to lead to perhaps the start of a decent leg lower (120’s?).

The 127/128 will be where I’ll watch for an initial move becoming stretched. That will give me somewhere to look to take profit and also to add back (or add more) if it breaks. So, even if you aren’t already in a trade, these areas are where you may get an opportunity just based on the techs rather than the fundamentals.

USDJPY technical analysis chart

I also like my colleagues’ Kman’s view of AUDJPY as a BOJ trade. Again, matching off the fundamentals between the two, we’ve seen Aus inflation coming down more than expected, which pushes the RBA further towards less hikes, and Aus related commods haven’t been doing great either. So, again, any move that pushes AUD out of sync with its own issues potentially leads to a decent counter trade. I’m watching another zone in the pair.

AUDJPY technical analysis chart

Now, you may think that I’m taking it for granted that the BOJ are going to move away from easing, and thus JPY will definitely rally but that’s not the case. I’m just going on the signals I’m deciphering from the BOJ and the data, that they are as close to being able to end easing as they’ve ever been, plus I think inflation is going to stay toppy for them, as it is for everyone else. The evidence (IMO) is stacking up for them to be able to turn and I’m happy to trade that until something comes along that makes those thoughts invalid.